Index Universal Life Insurance

If you are risk averse and would like to see your investment grow in a safe manner, you should look into the Index Universal Life Insurance’s advantages

This section of the website will take about 10 minutes of reading. Be patient, it’s worth it.  

People Tend To Forget The Good Years, But...

   Do you remember the year 2007? Not too many people do. Everybody was making good money, their retirement and investment accounts were growing fast and furious. Most of the people could see themselves retiring way before their 65th birthday. 

   If you needed a loan, banks were practically pushing each other away with a better and crazier offer. If you could fog a mirror, you were getting a loan. They were practically giving the money away.

   People tend to forget the good years, but ask anyone if they remember 2008. Most of the people remember that year. The market crash has caught them unprepared. Their life savings have been decimated. Most of the 401K’s have become 201k’s and some become 101k’s. Most of these folks remember their desperation while seeing their retirement money disappear. I can’t even imagine the people that were just few years away from retirement. Their whole perspective has changed. They realized that they will have to keep on working for years after their retirement age just to keep their heads above water.

What Would You Have Done To Protect Your Investment?

   If you had a magic ball and knew that was coming, what would you have done? Would you have pulled the money out of the stock market, out of your IRA’s, 401K’s few days before the market crash, hold onto it until March 2009 when the market hit the lowest point and reinvest it? Well, nobody has that magic ball, you don’t know when the market will crash and for sure you don’t know what is the lowest point in the market until some time has passed and can read the signs that the economy is moving in the right direction, right?

   Now, since 2009 we have witnessed the biggest bull market that ever was in the US history. Can we foresee when the next crash will happen? No, for sure we can’t. We don’t have a magic ball. Do we? Can we predict how bad the next crash will be? No, we can’t. 

But can we do something to protect ourself from a major bust.

   Update: Coronavirus just hit us and we don’t know how soon the market will balance itself or how low it will go.

What Do You Think Taxes Will Do In The Future?

   Let me change the subject a little bit.

   Now let’s look at the other side of the coin.

   Do you believe that taxes will be higher in the future?

   Again, we don’t have a magic ball…but that’s what I believe. Do you pay your bills? If bills get higher than your budget, what do you do? Do you find another job or a side hustle to make your ends meet? I am pretty sure you do. How does the United States pays its bills?  

   By collecting taxes, of course.

   Just in the past 14 years the US national debt has almost tripled from 8 trillion to $23+ trillion and that is just the last 14, years. The debt continues to grow at an astronomical pace. This debt will have to be paid somehow.

   Again, I don’t have a magic ball and don’t want to say for sure that the taxes will increase in the future, but if they are, would you pay your taxes today or wait until later when the tax rates have increased.

Would You Rather Pay Taxes On A Small Amount Now Or A Very Large Amount Later

   Now can we look at the third … side of the coin. 🙂

   What would you rather do, pay taxes on the amount of money that you put into your retirement plan, when you put the money in the account or would you rather pay taxes later and you will pay on the money that you put into your account plus the growth?

   Now let me illustrate this for you. You are a farmer and you go to the seed store to buy seeds to plant corn.

   Your buddy, the store owner comes to you and says: Hey buddy, you don’t owe me any money for the taxes right now but when you harvest, I will come to you and charge you tax on the money you will make from your whole harvest. Also, by the way, I will not guarantee that the tax rate will be the same as today.

   How would you respond to your buddy? Remember we have to be civil.

What Type Of Money Would You Rather Have In Retirement?

  So, in retirement you will have 2 types of money:

  1. Taxable
  2. Tax Free

   Which one would you rather have? I am pretty sure you answered TAX FREE !!! If not, I think we have to go back to the drawing board.

   In the Taxable category there are 2 types of taxation:

  1. Capital Gain Tax
  2. Income Tax

   You will pay Capital gain tax for investments in stocks, real estate, etc and you will pay income tax on qualified plans that are tax deferred like 401K, 403B, IRA, etc

Tax Free Retirement

Now let’s look at the Tax Free category where you have only 3 options:

  1. Municipal Bonds
  2. Roth IRA
  3. Permanent Life insurance – Indexed Universal Life insurance

1-Municipal bonds have not provided a viable alternative in the past so I will not even talk about them.

2-Roth IRA’s are a wonderful product if you are not risk averse.. Their returns are tied to a mutual fund or some certain stock? Because of this, you will take more risk, having your money tied in a Roth IRA. If you are not risk averse, Roth IRA’s are a great place to save for retirement. There are also limitations on the Roth IRA. Your income can’t be higher than $124,000 single or $196,000 married and you can’t save more than $6000 a year ( $7000 if  you are over 50). Also you will have to keep money in there until you are 59 ½ otherwise you will incur  a 10% penalty and you will be paying income tax on the money you will withdraw.

3- Permanent Life Insurance - Indexed Universal Life Insurance

   3-Now if I talked about risk, you know that most investments have a risk. Most tax deferred qualified plans are tied to some type of a mutual fund or a stock that can go up or down. What happens to your retirement investments if the market will crash before you are ready to retire? 

   How happy will you be to have to keep on working through your retirement years?

   Your third option and in my opinion the best for a Tax Free Retirement, will be Permanent Life Insurance and more precise an Indexed Universal Life Insurance. I have to say, it is not a product for everyone. Since the payments are flexible and they are not forcing you to make your payments, if you are not disciplined enough to put money into your policy, you can find yourself into hot water pretty easy.

   Also, because you can borrow money interest free against your cash value, a lot of people are tempted to borrow for things that are not really necessary, thus borrowing more than they should. On the other hand if you use it responsibly, you are disciplined and you understand how to use an Indexed Universal Life Insurance, you can have a happy and worry free retirement. If it is used right, an IUL can be used to create generational wealth  can be used to pay for college or it can be used to pay your mortgage off also.    

How Does An IUL Work?

   Let’s go into the nitty-gritty of how an IUL works        

   If you would find out that there is a blackjack table in Vegas that will give you your money back and  80% of your winning whenever you have a winning hand, but they will also give your money back when you have a losing hand, will you go there over and over again? I bet you will have to fight for a spot at that table. Well, Permanemt Life Insurance tied to an Index called an Indexed Universal Life Insurance works kind of like that imaginary blackjack table.

   Once you understand how an IUL works:

   1-  With an index tied investment, with a cap and a floor

   2- It takes advantage of the real rate of return versus the rate of return 

   3- An IUL will let you borrow money against the policy without losing any money from your cash value, 

   4- The money that you borrow are in most cases borrowed at 0%,

   5- There is no limit as to how much money you put into this policy per year, unlike most qualified accounts, as long as the death benefit grows accordingly, 

   6- Your heirs are guaranteed a death benefit, the money you borrow don’t have to be paid back until you pass away and it will be paid from the death benefit and the cash value,

   7- Your cash value gains grows tax free. 

  Your head will start spinning at the possibilities this instrument offers. See how you can use an IUL to create generational wealthpay for college or pay off  a mortgage.

1. Tied To An Index With A Cap And A Floor

   Index Universal Life Insurance is a life insurance with a cash value policy attached to it. The money that you will deposit in there are after tax money. Part of the money you deposit goes to pay for life insurance while the rest goes into growing your cash value. Also a small percentage goes for maintaining the account.

   The cash value grows tied to an index, the most used being the S&P index, even though right now you can find IUL’s tied to any kind of an index or a mixture of indexes.

   So, if an index will have gains, then the cash value in that account has gains. The gains have a cap rate of between 12% to 15% and a floor that is usually 0%. Remember the imaginary Las Vegas black jack table … If you win, you will not get all of the winnings, you will get a percentage of it. That percentage is called a participation rate. The participation rate can be from 1 to 2% If the market tanks though, an IUL has a floor of 0% so for that year you will not have a loss but you will get to keep the all of the money in your account.  

  Let me run some numbers for you. Let’s say Wallstreet performed incredible this year and provided a return of 18% in the S&P index (yeaaay !!!). Your cash value in your IUL will grow at 15% only – remember you have a 15% cap rate. Now, let’s say the next year the S&P grows at only 14%, your cash value will grow at only 13%. The insurance company has subtracted the 1% for the participation rate . Different IUL products have different participation rates. You will know the participation rates upfront. Let’s assume that the next year after this one is 2008 and the S&P market takes a hit of 57% until 2009, your cash value will not grow at all but most importantly, will not take a loss (you are WELCOME !!! )

2. Take Advantage Of The Real Rate Of Return Vs Rate of Return


This is a principle based on the fact that an IUL has a floor and will not go negative versus all of the other investments. 

   Can we do some math together? We have brothers Bob and Jim. Bob is not risk averse and decides to invest in a mutual fund tied to an index. Jim decided to play safe and have an IUL tied to the same index. Lets say both of them decided to invest $100,000.

   1st year –  market did amazing and grew by 24%. Bob will have $124,000 (100,000 + 24%) while Jim will have $115,000 (100,000 + 15% – IUL has a cap rate of 15%) . Advantage Bob

   2nd year – the market did good and provide a return of 14%. After the second year Bob will have $141,360 (124,000 + 14% ) and Jim will have  $128,000 (115,000 + 12% IUL has a participation rate ). Advantage Bob.

   3rd year – it is 2008 and the market has a drop of 47%. After the 3rd year Bob will have $74,920 (141,360 – 47%) while Jim still have $128,000 (the IUL’s floor rate is 0%). Big Advantage Jim.

   4th year – Bob starts it with $74,920 ( a loss of more than 25% from his initial investment) while Jim has $128,000. 

   The stock market experts expect a “market adjustment” every 7 to 8 years. Do you have time to play that game?

   What if you have your money tied until you are 59 1/2 years old and can’t pull them out without paying a large penalty?  We have some roll over solutions for you where you can have your money rolled over into an account that is managed by one of the top Active Money Managers in the country or have the account rolled over into an index tied annuity that will have the same cap and floor protection. Contact us for more info.

   The percentages for the stock or index on the above examples are for illustration purposes only. Also, if your name is Bob … tough luck 🙂

3. You Can Borrow Money Against Your Cash Value

   In an IUL you don’t pull money out of the cash value, you borrow money against the cash value. The keyword here is BORROW. 

   The cash value stays intact and continues to grow in your account. If the balance in your cash value account is at a healthy level, you will not have to repay that loan until you pass away and it will be taken out of your death benefit.

   You will not be able to borrow more that a certain percentage of your cash value amount. This can be up to 80 or 95%. This will be spelled out in your policy

4. Most IUL's Will Charge A 0% Interest On The Loan
Taken Against The Cash Value


Not all insurance companies will charge you 0%. Some companies might charge you an interest between 1 to 3%. Make sure you check this before you get a policy.

   Like all of the other variables in an IUL like the Cap Rate, Floor Rate , Participation Rate, Maintanence Fees, this Interest Rate has to be disclosed upfront in your policy. 

   If these variables are not disclosed up front, not only walk away but run.

5. There Is No Limit As To How Much Money You Can Put In An IUL

   As long as there is a balance between the amount of the money you have in the cash value and the death benefit, you can put as much money into your account. Unlike most of the qualified accounts that have a maximum amount that you can save every year, an IUL doesn’t. 

   If the mathematical equation that the insurance company calls it the 7 pay test is ok you are all good. If the equation goes on the wrong side, the policy becomes a Modified Endowment Contract (MEC) and you will lose your tax free benefit. 

   I will not bore you with the details of a MEC. All you have to know, is to make sure that your insurance company has an automated trigger that will notify you ahead of time when a policy is about to become a Modified Endowment Contract so that you will increase the death benefit or decrease the cash value. 

6. Your Heirs Are Guaranteed A Death Benefit

Unlike a term life insurance policy where there is a term limit of 10, 20, 30 or 35 years or an age limit, the IUL policy doesn’t have a term limit. 

   It is a permanent life insurance. Your heirs will receive both the death benefit and the cash value minus any loans you have taken against the cash value, totally tax free.

   Sounds like a pretty good deal for your heirs :). This is another way to create generational wealth.

7. Your Cash Value Gains Grow TAX FREE

   Unlike qualified accounts, your cash value in an IUL account grows totally tax free. This advantage should have been the first one in this line of advantages. I left it last, so that I leave you with a very impressive illustration. 

   I would like to present to you the life long tale of 2 brothers. I will be using Bob and Jim again, they are 30 yrs old twins. Each of them saved $7200 for their retirement each year. Each of them saved money for 30yrs. Bob saved money in a 401K (qualified account) while Jim saved in an IUL.  

   In 401K the  $7200 are not taxed, in IUL they are taxed.

At the end of the 30 yrs Bob has saved $740,000 in his 401K while Jim saved $580,000 in his IUL ( A part of his money went into paying for a death benefit)

   Bob with his 401 K  will have to pay taxes on his $740,000 and taxes will probably be higher in 30 yrs

   Jim with his IUL will get the $580,000 tax free. He will get the retirement money out as a loan at 0% interest. 

   Let’s say that both Bob and Jim will need $40k / year for their retirement. 

   So far, everybody thinks that Bob is the one that has the advantage but let’s see what happens with their money after they start their retirement.

                  Bob                                                Jim

                $740k                                             $580K

1st year  get 60k                                            get 40k (loan at0%)

                Pay 20k in taxes                            no tax

Bob has to withdraw $60K instead of $40K to pay for his taxes

Cash value $ 680K                                        $580 K – no loss in value – it was a loan

2nd year  Get $60k                                        get $40K  (loan at 0%)

                Pay $20K in taxes                         no tax

Cash value  $620K                                        $580K

  By the end of the 3rd year Bob will have less money than Jim in his cash value.  

   When Jim dies, the death death benefit covers all loans and what is left will also be left to the heirs along with the cash value.

   Both of them will still make  money on the interest in their cash value and we didn’t consider that also. Bob  can still lose a lot of his cash value if the market goes negative, while Jim is still protected by the floor rate.

   I know that this is not the perfect scenario. It is impossible to do a perfect scenario with so many variables. We didn’t take in consideration the taxes that Jim paid for this money, we didn’t take into consideration that Jim has a death benefit for his heirs, we didn’t take into consideration any major market drops that could have wiped out Bob’s savings while Jim is protected by the floor rate, etc. I know a lot of naysayers will argue that the numbers are not realistic with what is actually happening in real life. Nobody can guarantee you a certain amount when you have so many variables. These projections are here just to prove a point and the point I am trying to make is about what happens with your cash value after retirement.

   The best way to see how an IUL works is to get an illustration done for you. If you want one done for you fill out the form on the bottom of this page or contact us.

   If you would like to learn about the principles of finance and how to retire wealthy, join our hour and a half webinar – How To WIn At The Game Of Money.

   If you would like to receive a Financial Needs Analysis to see where you are and to set a financial goal for you and your family, click here.

   If you would like to set a FREE ½ hour consultation, check my calendar and set an appointment.

   For any questions, contact us

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Hegemon Group International, LLC. (HGI) is a marketing company offering a vast array of products and services through a network of independent affiliates. HGI does not provide insurance products, real estate, legal or tax advice. In the USA, insurance products offered through Hegemon Financial Group, LLC (HFG); and in California, insurance products offered through Hegemon Insurance Solutions, LLC (California License #0I0198) – collectively HFG. HFG is licensed in all states and the District of Columbia, except Massachusetts. In Canada, insurance products offered through Hegemon Group International of Canada ULC in the provinces in which it is licensed.

Florin Chris Uta is an independent associate of HGI.

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